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What lies ahead for bank stocks amid Middle East tensions, oil rally?

A surprise air-strike by the US that killed Iran’s key military leader Qassem Soleimani, on January 3, spooked financial markets across the world and Indian markets have been no different. The development saw a sharp spike in crude oil prices stoking fears of inflationary pressure which, in effect, could prompt the Reserve Bank of India (RBI) to hold interest rates. This, according to analysts, has weakened prospects of banking stocks, and they expect some correction in these counters. 

Since January 3, most banking stocks have slipped at the bourses. RBL Bank has been the hardest hit, down nearly 9 per cent in the last two trading days, followed by Punjab National Bank and Bank of Baroda (8 per cent each), State Bank of India (6 per cent), The Federal Bank and IDFC First Bank (about 5.5 per cent each), and YES Bank and Axis Bank (over 4 per cent each). Nifty Bank index slipped 3.7 per cent during the period.

Besides, uncertainty over the capital infusion proposal for the public sector banks (PSBs) under the upcoming Union budget for 2020-21 has also soured investor sentiment. According to news agency PTI, the government may not propose fresh capital infusion under the Budget, and will rather encourage them to expedite recovery of bad loans and raise funds from the market.

“The banks may be asked to divest or sell their non-core business as part of the fund-raising exercise during 2020-21. Additionally, banks may be asked to depend on the robust pipeline of recovery from the resolution of both NCLT and non-NCLT cases during this calendar year and also maintain headroom for raising capital from the market,” the report said. READ MORE

However, amid all these negatives, December quarter earnings for FY2O could be a silver lining in the sector, analysts say. Further, they opine that instead of government support, banks should depend on the recoveries from cases pending at National Company Law Tribunal (NCLT) to improve their balance sheets.

“Q3FY20 will be better in terms of asset quality as Essar Steel case has been resolved, but beyond that, regular challenges, including slow credit-off take and volatility in yields, remain," says Siddharth Purohit, research analyst at SMC Securities.

Echoing similar views, analysts at ICICI Securities said that resolution of large accounts like Essar Steel, Alok Industries and Bhushan Power & Steel along are expected to pare down industry gross net profit assets (GNPA) to 7.1 per cent though concerns on the resolution of recently recognised stressed companies remains a dragger.

Gaurang Shah, head investment strategist at Geojit Financial Services, says that while Geo-political conditions can’t be predicted, markets can only hope for no major escalation in tensions among the US, Iran and Iraq. He says that long-term investors should stay put under current circumstances, while short-term investors could begin investing in small amounts.


Most analysts are bullish on private banks but, they believe, that the anticipated recovery in large NCLT accounts and focus on the retail segment are likely to propel advance growth and earnings trajectory for PSU banks.

"We are bullish on ICICI Bank, HDFC Bank and Axis Bank, but advise to exercise caution on the back of the rally in the stocks," said Siddharth Purohit of SMC Securities. In the last three months, shares of ICICI Bank have surged 24 per cent, while Axis Bank and HDFC Bank have added 8.5 per cent and 3.3 per cent, respectively. In comparison, the S&P BSE Sensex has gained 7.2 per cent during the period.

ICICI Securities, which has "overweight" stance on the banking sector, is positive on Axis Bank and IDFC First Bank in the private bank segment. In the PSU bank space, it prefers SBI. "Peaking of NPA cycle and resolution of large stressed assets make dominant PSU banks a good investment opportunity," it said in a report dated December 31, 2019.

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